Reserve Bank mulls the next move

Reserve Bank Board meeting

• The cash rate has been left at a record low of 2.00 per cent. The Reserve Bank hasn’t provided any guidance on future interest rate changes.

What does it all mean?

• We are now at an interesting juncture. Nine economists believe that the Reserve Bank will cut rates again. Eight economists believe that interest rates have bottomed and will rise in the next 15 months, with one tipping the first move in February or March next year. The remainder of the 23 economists surveyed believe that the cash rate is likely to remain unchanged for an extended period.
• Meanwhile, the Reserve Bank again hasn’t declared its interest rate preferences. On cutting rates in May, the Reserve Bank decided against providing any guidance on the next move. That was part of a clear strategy to stop borrowers sitting on the sidelines in the hope that rates would fall even lower. And the lack of interest rate bias (the neutral stance) is again a feature of the June statement – rightfully in our opinion.
• We suspect that the Reserve Bank has a shopping list of factors that it wants to tick off before deciding the next move in rates. Some of the factors include: Wednesday’s economic growth data; the Greek debt negotiations; evidence that small businesses are embracing stimulus measures; and possibly the next investment data in three months’ time.
• On the latest investment data, the Reserve Bank hasn’t added to its views from the May meeting: “a key drag on private demand is weakness in business capital expenditure in both the mining and non-mining sectors and this is likely to persist over the coming year.”
• On home prices, the Reserve Bank hasn’t changed its rhetoric, it believes the so-called housing boom is a Sydney story. “Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities.”
• On the Australian dollar, the Reserve Bank’s comments are exactly the same as the May statement – it believes that further depreciation against the US dollar “seems both likely and necessary”.

Perspectives on interest rates

• The previous rate cut was in May 2015 (25 basis points), taking the cash rate to a record low of 2.00 per cent.
• There have been 10 rate cuts since November 2011.
• The Reserve Bank had previously lifted rates seven times from October 2009 to November 2010 – a total of 1.75 percentage points, from 3.00 per cent to 4.75 per cent.

What are the implications of yesterday’s decision?

• Borrowers have even more reason to question whether rates have bottomed. Despite some weak investment data (albeit old data, predating the May rate cut and budget stimulus) the Reserve Bank has decided against providing an explicit interest rate bias or leaning. The hope is that businesses will now start to embrace the stimulus on offer, fearing that if they don’t, they will miss out on super-low rates.
• On the negative side, the fear of missing out could prompt some more marginal borrowers to buy property or other assets. The hope is that banks and regulators are diligent in credit analysis at this point in the interest rate cycle.